The demand curve of a perfect competitive market is infinitely elastic indicating that the firm can

Step 1: Analyze the question The question asks what it means for a perfectly competitive firm to face an infinitely elastic (perfectly elastic) demand curve.

Step 2: The concept In perfect competition there are many buyers and sellers selling identical (homogeneous) products. Because each firm is very small compared with the whole market, it cannot influence the price. It is a price taker: the market sets the price, and the firm accepts it.

The demand curve facing the firm is therefore a horizontal line at the market price. This means:

• Price elasticity of demand = infinity.
• Price = Average Revenue = Marginal Revenue (P = AR = MR).
• The firm can sell as much as it is able to produce at that price.
• If the firm raises its price even slightly, it loses all its customers, because buyers can get the identical product from other sellers at the market price.
• It has no need to cut its price either, since it can already sell all it wants at the market price.

Step 3: Check the options

• A. Refuse to sell any quantity: Wrong. This has nothing to do with elasticity.
• B. Sell any quantity of output at the prevailing price: Correct. The horizontal demand curve means the firm can sell whatever quantity it chooses at the market price.
• C. Sell fixed quantity at the prevailing price: Wrong. The quantity is not fixed; the firm is free to choose how much to sell.
• D. Sell less quantity: Wrong. This is not what the curve implies.
• E. Sell more quantity at a higher price: Wrong. A higher price would mean losing all sales, because the firm is a price taker.

Step 4: Answer

Tip: Remember "Perfect competition = Price taker = Horizontal demand curve." Whenever you see "infinitely elastic" or "perfectly elastic" demand for a firm, think: any quantity, but only at the market price.